City Holding Company Announces Third Quarter Results

CHARLESTON, W.Va. Oct. 25 /PRNewswire-FirstCall/ -- City Holding Company, "the Company" (Nasdaq: CHCO), a $2.6 billion bank holding company headquartered in Charleston, today reported financial results for the third quarter ended September 30, 2010.  The Company's earnings remained strong, with a $28.4 million (1.6%) increase in the Company's loan portfolio and a $42.5 million (2.0 %) increase in its average depository base from the quarter ended September 30, 2009.  This growth, bolstered by a continuation of solid credit quality trends, helped offset the impact of lower service fee income and other-than-temporary losses in the Company's investment portfolio.

The Company reported net income per diluted share for the third quarter of $0.58 compared to $0.66 per diluted share in the third quarter of 2009.  Net income for the third quarter of 2010 was $9.0 million compared to $10.5 million in the third quarter of 2009.  For the third quarter of 2010, the Company achieved a return on assets of 1.36%, a return on tangible equity of 13.9%, a net interest margin of 3.94%, and an efficiency ratio of 54.2%.  For the first nine months of 2010, the Company achieved a return on assets of 1.46%, a return on tangible equity of 15.0%, a net interest margin of 4.10%, and an efficiency ratio of 53.7%.

Commenting on the Company's results, Charles Hageboeck, Chief Executive Officer said, "Our financial performance, while down slightly from the year-earlier quarter, remains at a strong level compared to our peers and despite the ongoing challenges facing financial institutions in the form of an uncertain economy, additional regulations and ongoing pressures from the sustained low interest rate environment.  City's asset quality remains strong and stable with past dues and non-performing assets down from December 31, 2009.  Net charge-offs for the nine months ended September 30, 2010 are approximately 60% of net charge-offs for the nine months ended September 30, 2009.  During the fourth quarter of 2010, two Greenbrier properties held in Other Real Estate Owned sold at values that approximated the Company's recorded values in such properties.  These sales reduced the Company's remaining Greenbrier related loan balances to $8.1 million, with $7.1 million recorded in the Company's Other Real Estate Owned category.  Our net interest income, exclusive of the impact of our interest rate floors, increased $0.7 million from the quarter ended September 30, 2009.  We saw loans grow during the quarter and we continued to carefully control our expenses.  

"During the quarter, we faced two significant headwinds – additional regulations impacting our service fee revenues and further credit-related net investment impairment losses.  As anticipated, our service fee revenues were impacted by changes during the quarter in the Electronic Funds Transfer Act ("Regulation E").  The reaction from our customers to this choice essentially met our expectations – the majority of customers who utilize these services elected to 'opt in' and the majority of those who have not used these services did not.  As a result of these changes, our service fee revenues declined $0.75 million (7.1%) from the quarter ended June 30, 2010 and $2.0 million from the quarter ended September 30, 2009.  In addition, the Company experienced further credit-related net investment impairment losses of $2.9 million during the quarter, primarily in our portfolio of community bank and bank holding company equity positions.

"Despite these headwinds, City's continued trend of solid earnings has allowed the Company to maintain our quarterly dividend of 34 cents per share during a time period in which many banks have eliminated or significantly reduced dividends to shareholders.  Our healthy capital levels, strong liquidity, and stable core-deposits enable City to consider the opportunities of growing our company through acquisitions.  City continues to be one of the most profitable and best capitalized publicly traded banks in the U.S. and we believe we can maintain solid, industry-leading performance as we move forward," Hageboeck concluded.

Net Interest Income

The Company's tax equivalent net interest income decreased $0.5 million, or 2.0%, from $23.9 million during the third quarter of 2009 to $23.4 million during the third quarter of 2010.    This decline is due to a decrease in interest income associated with the gain from the sale of interest rate floors.   During the third and fourth quarters of 2008, the Company sold $450 million of interest rate floors.  The $16.7 million gain from sales of these interest rate floors is being recognized over the remaining lives of the various hedged loans – primarily prime-based commercial and home equity loans.  During the third quarter of 2010, the Company recognized $0.9 million of interest income compared to $2.2 million of interest income recognized in the third quarter of 2009 from the interest rate floors.  This decline was partially offset by the decrease in interest expense exceeding the decline in interest income from the third quarter of 2009 resulting in an increase in tax equivalent net interest income of approximately $0.8 million.  The Company's reported net interest margin decreased from 4.09% for the quarter ended September 30, 2009 to 3.94% for the quarter ended September 30, 2010.

Credit Quality

Past due loans decreased from $11.7 million at June 30, 2010 to $7.9 million or 0.43% of total loans outstanding at September 30, 2010 due primarily to a $2.0 million commercial real estate loan in the Eastern Panhandle of West Virginia returning to current status.  Past due commercial, financial, and agriculture loans were $0.3 million or 0.03% of loans outstanding at September 30, 2010; past due residential real estate loans were $3.8 million or 0.63% of loans outstanding at September 30, 2010; and past due home equity loans were $2.9 million or 0.70% of loans outstanding at September 30, 2010.

The Company had net charge-offs of $2.9 million for the third quarter of 2010. Net charge-offs on commercial and residential loans were $2.0 and $0.6 million, respectively, for the third quarter.  Charge-offs for commercial loans were primarily related to a specific impaired credit that had been appropriately considered in establishing the allowance for loans losses in prior periods. In addition, net charge-offs for depository accounts were $0.3 million for the third quarter of 2010.  While charge-offs on depository accounts are appropriately taken against the Allowance for Loan Losses ("ALLL"), the revenue associated with depository accounts is reflected in service charges.

At September 30, 2010, the ALLL was $18.4 million or 1.01% of total loans outstanding and 160% of non-performing loans compared to $19.6 million or 1.09% of loans outstanding and 119% of non-performing loans at September 30, 2009, and $18.5 million or 1.03% of loans outstanding and 131% of non-performing loans at December 31, 2009.  

As a result of the Company's quarterly analysis of the adequacy of the ALLL, the Company recorded a provision for loan losses of $1.85 million in the third quarter of 2010 compared to $1.7 million for the comparable period in 2009.  The ALLL recorded as of September 30, 2010 reflects financial difficulties of certain commercial borrowers of the Company that occurred during the quarter, the downgrade of their related credits, and management's assessment of the impact of these difficulties on the ultimate collectability of the loans.  Changes in the amount of the ALLL and related provision for loan losses are based on the Company's detailed systematic methodology and are directionally consistent with changes in the composition and quality of the Company's loan portfolio. The Company believes its methodology for determining the adequacy of its ALLL adequately provides for probable losses inherent in the loan portfolio and produces a provision and allowance for loan losses that is directionally consistent with changes in asset quality and loss experience.  

Impairment Losses

During the third quarter of 2010, the Company recorded $2.9 million of credit-related net investment impairment losses.  The charges deemed to be other than temporary were related to pooled bank trust preferreds ($0.7 million credit-related net impairment losses) with a remaining book value of $6.5 million at September 30, 2010 and community bank and bank holding company equity positions ($2.2 million credit-related net impairment losses) with remaining book value of $5.1 million at September 30, 2010.  The credit-related net impairment charges related to the pooled bank trust preferred securities was based on the Company's quarterly reviews of its investment securities for indications of losses considered to be other than temporary.  Based on management's assessment of the securities the Company owns, the seniority position of the securities within the pools, the level of defaults and deferred payments within the pools, and a review of the financial strength of the banks within the respective pools, management concluded that credit-related net impairment charges of $0.7 million on the pooled bank trust preferred securities was appropriate for the quarter ended September 30, 2010.  The credit-related net impairment charges of $2.2 million related to the Company's equity position in First United Corporation of Oakland, Maryland.  The Company determined that this security was other-than-temporary impaired due to the recent announcement by First United Corporation of another quarterly loss, which continued a trend of poor performance over the past several quarters. As a result, management determined that the length of time and extent to which the market value of this security has been below the Company's cost basis is not expected to recover in the near term.  These losses were partially offset by realized investment gains of $1.3 million as the Company sold certain single issuer trust preferred securities with a remaining book value of $75.4 million during the quarter ended September 30, 2010.  

Non-interest Income

Exclusive of net other-than-temporary investment impairment losses, non-interest income decreased $1.5 million to $13.2 million in the third quarter of 2010 from $14.7 million in the third quarter of 2009.  Service charges from depository accounts decreased $2.0 million, or 17.0%, to $9.7 million in the third quarter of 2010.  This decline is primarily attributable to the Company's compliance with new federal rules under the Electronic Funds Transfer Act, also known as Regulation E.  The changes to this regulation affect how banks can offer certain overdraft services, and were effective July 1, 2010 for new customers and August 15, 2010 for existing accounts.  The decrease in service charges from depository accounts was partially offset by an increase in bank owned life insurance revenues of $0.3 million due to death benefit proceeds and an increase in insurance commission revenues of $0.1 million, or 11.4%, from $1.2 million during the third quarter of 2009 to $1.3 million during the third quarter of 2010.

Non-interest Expenses

Non-interest expenses increased $1.0 million from $18.8 million in the third quarter of 2009 to $19.8 million in the third quarter of 2010.  Insurance and regulatory expense increased $0.8 million, or 202.7%, from the quarter ended September 30, 2009 primarily due to the impact of the Company fully utilizing its FDIC credits during 2009 and increases in the assessment rates during 2010, which increased our FDIC insurance expense from $0.1 million for the quarter ended September 30, 2009 to $1.0 million for the quarter ended September 30, 2010.  In addition, salaries and employee benefits increased $0.2 million, or 2.0%, from the quarter ended September 30, 2009 to $9.8 million.    

Income Tax Expense

The Company's effective income tax rate for the third quarter of 2010 was 31.4% compared to 32.5% for the year ended December 31, 2009, and 32.4% for the quarter ended September 30, 2009.  The effective rate is based upon the Company's expected tax rate for the year ending December 31, 2010.  During the quarter ended September 30, 2010, the Company realized $0.1 million of previously unrecognized tax positions compared to $0.2 million during the quarter ended September 30, 2009.

Balance Sheet Trends

As compared to December 31, 2009, loans have increased $33.4 million (1.9%) at September 30, 2010 due to increases in commercial loans of $13.3 million (1.7%), home equity loans of $12.7 million (3.2%), and residential real estate loans of $9.7 million (1.6%).  As compared to September 30, 2009, loans have increased $28.5 million (1.6%) at September 30, 2010 as home equity loans increased $14.8 million (3.7%), residential real estate loans increased $14.7 million (2.5%), and commercial loans have increased $3.1 million (0.4%).  

Total average depository balances decreased $16.6 million, or 0.8%, from the quarter ended June 30, 2010 to the quarter ended September 30, 2010.  This decline was primarily in time deposits and noninterest-bearing deposits, which have decreased $9.0 million and $5.8 million, respectively.  As compared to the quarter ended September 30, 2009, total average depository balances have increased $42.4 million, or 2.0%, for the quarter ended September 30, 2010.  This increase was due to increased noninterest bearing deposits ($30.8 million), interest bearing deposits ($30.6 million), and savings deposits ($11.9 million) that were partially offset by a decrease in time deposits ($30.7 million).

Capitalization and Liquidity

One of the Company's strengths is that it is highly profitable while maintaining strong liquidity and capital.  With respect to liquidity, the Company's loan to deposit ratio was 84.6% and the loan to asset ratio was 69.5% at September 30, 2010.  The Company maintained investment securities totaling 17.2% of assets as of this date.  Further, the Company's deposit mix is weighted heavily toward checking and saving accounts that fund 45.1% of assets at September 30, 2010.  Time deposits fund 37.0% of assets at September 30, 2010, but very few of these deposits are in accounts that have balances of more than $150,000, reflecting the core retail orientation of the Company.

The Company is also strongly capitalized. The Company's tangible equity ratio was 10.0% at September 30, 2010 and 9.8% at December 31, 2009.  At September 30, 2010, City National Bank's leverage ratio is 9.12%, its Tier I capital ratio is 12.17%, and its total Risk-Based capital ratio is 13.13%.  These regulatory capital ratios are significantly above levels required to be considered "well capitalized," which is the highest possible regulatory designation.

On September 29, 2010, the Board approved a quarterly cash dividend to 34 cents per share payable October 31, 2010, to shareholders of record as of October 15, 2010.  During the quarter ended September 30, 2010, the Company repurchased 111,136 common shares at a weighted average price of $28.72 as part of a one million share repurchase plan authorized by the Board of Directors in October 2009.  

City Holding Company is the parent company of City National Bank of West Virginia.  City National operates 68 branches across West Virginia, Eastern Kentucky and Southern Ohio.

Forward-Looking Information

This news release contains certain forward-looking statements that are included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such information involves risks and uncertainties that could result in the Company's actual results differing from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to, (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3) the Company may experience increases in the default rates on previously securitized loans that would result in impairment losses or lower the yield on such loans; (4) the Company may not continue to benefit from strong recovery efforts on previously securitized loans resulting in improved yields on these assets; (5)  the Company could have adverse legal actions of a material nature; (6) the Company may face competitive loss of customers; (7) the Company may be unable to manage its expense levels; (8) the Company may have difficulty retaining key employees; (9) changes in the interest rate environment may have results on the Company's operations materially different from those anticipated by the Company's market risk management functions; (10) changes in general economic conditions and increased competition could adversely affect the Company's operating results; (11) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company's operating results; (12) the Company may experience difficulties growing loan and deposit balances; (13) the current economic environment poses significant challenges for us and could adversely affect our  financial condition and results of operations; (14) continued deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments; and (15) the effects of the Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") recently adopted by the United States Congress.  Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

SOURCE City Holding Company